Prague Twin

Thursday, November 02, 2006

Market Update

Much to my chagrin, I have been predicting a major slowdown for the U.S. economy starting in Q1. I never did change my tune, believing as I still do that the fundamental factors that have been propelling this market are without solid foundations. These include, but are not limited to, the housing bubble, the practice of drawing equity out of a home and spending it, the negative savings rate (now 13 months strong), and the focus on mergers and acquisitions (in the U.S.) as opposed to organic growth (as in Europe).

Europe's most developed economies (Germany in particular) have been taking it on the chin from analysts for the last few years. Analysts cite slow growth and high unemployment. My view has been that the European economy has been growing at a sustainable rate. German GDP is now growing at an anual pace of over 2.5% whereas the latest U.S. figure is 1.6%. Emerging markets, like the one I live in, are no longer yielding the huge returns that they did a few years ago. Yet despite the median yield on an investment in the Czech Republic dropping from 16% to about 6% over the last several years, another $1.5 billion in foreign direct investment reached the Czech Republic in 2005. But these high levels of investment are starting to moderate as investors see potential in the more developed economies in Germany and France. German real estate in particular is now poised for a healthy comeback, just as United States real estate is deflating.

Yesterday, the ISM index showed that U.S. manufacturing is experiencing minimal growth, almost stagnation in fact. Construction spending is down .3% and since construction accounts for about 10% of all manufacturing in the U.S., this number weighed heavily on the ISM as a whole.

The equity markets were slow to react to this, but the bond market wasted no time as the yield on the 10-year note dropped to just above 4.54%. This is nearly 75 basis points below the Fed's overnight rate of 5.25% which makes the inversion quite extreme. The best quote I heard yesterday from the bond pit in Chicago was this...

The equity market is sitting in the living room watching television thinking everything is fine while the home office (the bond market) is on fire in the next room.

The Dow is off nearly 50 points in the first hour of trading today. Most of the big retailers missed their earnings targets which is weighing heavily on the market.

Does anyone else smell smoke?

Update: Here are the top five headlines from Reuter's business today.

1. Retailers post disappointing October sales
2. Productivity growth stalls
3. Jobless claims rise 18,000 in latest week
4. Apparel retailers suffer through dreary October
5. Wal-Mart sees Nov same-store sales flat

And the Dow is making a comeback. I guess they don't smell any smoke.


  • Like I have said previously; the "will to doom" crowd has been warning me about a "correction" for the bulk of my adult life. In the words of Ted Knight: "Well,,, were waiting!"

    By Anonymous Arch Stanton, at 6:55 PM  

  • The economy as a whole is correcting, but stocks just seem to be going up.

    An interesting point is this: as the housing market slows, investors are looking elsewhere to put there money. Where are they going? You guessed it: the stock market.

    Gold is surging again.

    The main thing to watch is the Fed. Right now the market figures a 70% chance of a rate cut early next year. I think that is insane.

    If the Fed hikes rates unexpectedly in reaction to inflation concerns, all hell will break loose.

    By Blogger Praguetwin, at 8:02 PM  

  • Job number predictions? 135+ is the consensus, I believe.

    By Blogger reality-based educator, at 12:18 AM  

  • PT,

    How would I go about finding out how much an Iraqi dinar is currently worth compared to the American dollar? My husband wants to invest in Iraq by buying 25,000 Iraqi dinars for $45 and how it all came about reeks of scam-iness. If it's not comparable, he'll know he's getting screwwed if he makes this deal. If it is, maybe we can find a legitimate way to do it that is based on e-mails.

    By Blogger Stephanie, at 1:55 AM  

  • Sorry, that's kind of off-topic, but you're the only one I know who might know how to find that out.

    By Blogger Stephanie, at 1:56 AM  

  • RBE,

    I think we will see something like last month. A disappointing number, under 100k, but an upward revision to last month's anemic 51IK.

    But this month I really don't know. I'm staying out of the market for the realease. After last month's roller coaster ride, I'm feeling very shy.


    At the current rate $45 dollars should get you just over 66,000 Dinars.

    If you really want to buy them, seek out a reputable dealer. Never buy currency from someone who contacts you.

    By Blogger Praguetwin, at 8:02 AM  

  • RBE,

    I've changed my mind. Looking at the the long term chart, are noticed that since the NFP number went positive comming out of the 2001 recession, everytime a reading of under 100k came in, it was followed by a huge upward spike.

    Now, they could revise last months higher (which I think they will in any case), but considering how tight the job market seems to be as evidenced by the rise in unit labor costs, I'm going to predict a surprise to the upside.

    Market consensous is at 123K but gives it 135K. Also, some Forex traders are recommending going long on the dollar into the data. The market is long on the Euro right now. If we do get the upside surprise, that means the market was long and wrong, and we will get a major reaction.

    I'm staying well away from that action, thank you very much.

    By Blogger Praguetwin, at 12:21 PM  

  • I should have stuck with my initial analysis...

    I think we will see something like last month. A disappointing number, under 100k, but an upward revision to last month's anemic 51IK.

    92K and a 300% revision to last months number. That revision means that the 51K from last month doesn't exist anymore so the analysis in the other comment doesn't work.

    By Blogger Praguetwin, at 4:04 PM  

  • PT

    So then if the people mandated through their legislature a plan to drill in ANWR the president should yield. Correct?

    By Anonymous Arch Stanton, at 5:28 PM  

  • Thank you.

    By Blogger Stephanie, at 4:19 AM  

  • Stephanie,

    No problem.

    By Blogger Praguetwin, at 1:24 PM  

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